Strategies for getting the most out of a term plan at a very low cost

While it doesn't offer any returns, it helps you cut down outgo to a great extent while offering a much higher cover than any other life insurance plan

Recently, two life insurers – Max Life Insurance and Aditya Birla Sun Life Insurance (ABSIL) – conducted surveys to find out the financial preparedness of Indians. While the numbers differed, both companies have common findings. Individuals don’t prefer term plans though they are the cheapest product to provide security to their families.

The Max Life survey says that a third (33.3 per cent) of the respondents had life insurance policies, but only a fifth (20 per cent) had a term plan. The ABSIL survey shows that 83 per cent of the respondents were aware of the amount they needed to protect their families, but the extent of the cover was 1.67 times of the annual income. It should ideally be 7-10 times. It means only a few opted for a term plan.

A term plan is the best instrument to safeguard an investor’s life goals. It provides a significant cover for a small amount. A 30-year-old can get Rs one crore sum assured at Rs 8,260 for a policy term of 40 years. But most stay away from it as it offers no “returns”. Most other life insurance plans are investment products, whereas a term plan is not. It will, therefore, never give any "returns" at the end of the policy term unless you opt for a variant of it. While you may not get any money back if you buy a term policy, you can, however, use a few strategies to bring down the premium while ensuring that you have adequate cover.

Create an insurance ladder: Typically, as the number of years in a policy passes by, the need for insurance goes down. The insurance requirements would reduce in the subsequent years because of savings and asset build up.

Say, an individual is 35 and would retire at 60. He would need a policy of 25 years during his working life, when he is earning and contributing towards his life goals. Let's say he needs to create a corpus of Rs two crore for all his goals including retirement, children’s education and marriage. In this case, he will take a term plan of Rs 2 crore to ensure that if he dies, his family gets the targeted corpus. “As he saves and invests, his insurance requirement would keep coming down as his corpus grows. Supposing he builds a corpus of Rs one crore in the first 15 years. For the next 10 years, he will need insurance of Rs one crore, in tandem with the money he needs to reach his goals,” says Suresh Sadagopan, founder, Ladder7 Financial Advisories.

If this person opts for the cheapest online policy of Rs two crore for a term of 25 years, the annual premium will be Rs 17,396. This policy will give him a constant cover of Rs two crore until he turns 60, though he may not need that amount of coverage all the time. The premiums in a term plan increase if you opt for a longer policy term and/or higher cover. For the same profile, the premium for a 20-year term will be Rs 15,576. 

Instead of taking one plan of Rs two crore, if the individual splits the cover into four equal parts, that is, Rs 50 lakh each and also takes policies for different terms -– 10 years, 15 years, 20 years and 25 years -- he will save on premium without compromising on his insurance needs. Over 25 years, the individual will be paying Rs 4.48 lakh for a Rs two crore cover. When he splits or “ladders” the insurance cover, he ends up paying Rs 2.79 lakh for the same period -- a saving of Rs 1.7 lakh. The actual saving would differ from insurer to insurer and age of the insured.

From the tenth year onwards, his policies will start maturing at a gap of five years. For the first 10 years, the sum assured from four policies will be Rs two crore. The cover will fall to Rs 1.5 crore when he turns 45 with three plans of Rs 50 lakh each. It will further decrease to Rs one crore when he turns 50, and so on. Such laddering is popular among financial planners. Depending on the financial plan, they customise the strategy to an investor’s requirement.

Reducing cover for liabilities: When you are going for a home loan, it is advisable to take a term plan equivalent to the loan amount and also one that matches the tenure. In case something happens to the borrower, the term plan can pay for the remaining loan. If the legal heir is unable to repay after the borrower’s death, the lender will take possession of the house and sell it to recover the dues.

Instead of taking a term plan that has the same cover throughout the policy tenure, you can opt for a decreasing term assurance policy. In this plan, the sum assured decreases by a fixed amount every year. The benefit: the premiums are lower than a regular term plan. A public sector insurer, for example, charges a premium of Rs 67,449 for a cover of Rs 24 lakh for 30 years for a 35-year-old man. The borrower has to pay the premium upfront at one go. For the same profile and plan, the insurer charges Rs 1.01 lakh for regular plan paid as single premium.

Only a few insurers offer this plan to individuals. Most sell it as a group plan. If your lender gives you a plan with decreasing sum assured, do compare it with other insurers as well as regular term plan.

Single premium gets a discount: Instead of paying an annual or a monthly premium, if a person is ready to pay the entire premium at one go (single premium), insurance companies do offer a discount. For a 35-year-old taking Rs 50 lakh sum assured for a term of 20 years, the annual premium for the cheapest plan will be Rs 4,012, which means the insured will end up paying Rs 80,240 for the policy term. The same can be bought for Rs 59,531.

It is not a saving in real terms. Instead of paying the money upfront, if you invest half the money in a bank fixed deposit, it will double up in 8-10 years. This is called the time value of money. Opting for a single premium makes sense if you are going for a shorter policy term of 5-10 years. You can use this in laddering to save further. Most financial planner advice against paying upfront for long-term policies. “What if the insured dies, say, in the seventh year of taking the policy? In a 20-year-plan, he would have paid premium for additional 13 years in this case,” says Malhar Majumder, partner and consultant at Positive Vibes Consulting & Advisory.

One-time premium payment versus annual premium payment
Insurer	Plan	One-time premium (Rs)	Annual premium (Rs)	Savings (%)
HDFC Life Insurance	3D Plus life option	1,90,326	12,529	39.2
AEGON Life Insurance	iTerm	175,374	10,043	30.2
IndiaFirst Life Insurance	e-Term Plan	2,10,512	12,154	30.7
Aditya Birla Capital	Digishield	1,67,492	12,274	45.4
Kotak Life Insurance	Kotak e-term plan	2,59,954	16,992	38.8
Premiums are for a 35-year-old healthy male, non-smoker, living in a metro; Sum assured is Rs 1 crore, Policy term is 25 years; Source: www.policybazaar.com